02/05/2013 06:51 pm ET

Tax Relief Scammers Who Used Clients' Money To Fund Lavish Lifestyle Reach Settlement With FTC

The Federal Trade Commission took a major step to crack down on tax relief companies, announcing a multimillion dollar settlement with a company that allegedly bilked Americans out of millions of dollars after promising to make their tax bills go away.

On Tuesday the FTC said American Tax Relief would have to pay $15 million to settle claims that the company falsely advertised for debt-relief services it never provided. The move was a first for the federal agency and signalled new muscle in its fight against dodgy financial services operators.

Tax relief companies have stepped up marketing to consumers over the last few years, as more Americans slipped behind on bills, said Steven Baker, a spokesman with the FTC. "There are a lot of people who have gotten behind on income taxes and are looking for a solution," he said. That opens the door to tax relief companies, which advertise extensively, according to Baker.

American Tax Relief marketed its services on television, radio and the Internet and used actors to portray clients who said they had been able to reduce back taxes by thousands -- even hundreds of thousands -- of dollars. The company charged new clients fees between $3,200 and $25,000 for its services.

But the California-based company, which collected more than $60 million in payments from clients, failed to make good on its promises, the FTC alleged in 2010. After receiving hundreds of complaints about the company, the agency shut it down and froze its assets.

According to the FTC, American Tax Relief's fees paid for the company's owners' lavish lifestyle, which included a $3.4 million house in Beverly Hills; a fleet of luxury cars including a Ferrari, a Rolls Royce, a Bentley, two Porsches and two Mercedes-Benzes; along with jewelry and gold items. Under Tuesday's settlement, the defendants were ordered to surrender $15 million in cash and assets. Baker said the FTC could not comment on whether the company and its owners will face criminal charges.

High profile tax-debt cases regularly make headlines, but it's difficult to track the number of individuals who owe back taxes. Eric Smith, a spokesman for the Internal Revenue Service, said the government tax office makes "a couple million agreements" with taxpayers each year for payment programs.

Last year, the bureau revised its process to make it easier to create a payment plan for owed taxes, partly in response to the growing number of people facing financial hardship, Smith said.

Taxpayers who owe back taxes can apply for government payment or abatement programs without the help of a third party, according to the FTC. "Our concern is that [tax relief companies claim they can help you get rid of your tax debt, but they really can't do it," Baker said.